ICBC seeks funds after net profit up 16% in 2009

RoseYu

VictoriaRuan

JoanneChiu

SHANGHAI (MarketWatch) -- Industrial & Commercial Bank of China Ltd. (1398.HK) said Thursday it will raise fresh funds to shore up capital and slow asset growth this year, after the world's largest bank by market value posted a 16% rise in 2009 net profit, its smallest increase in the past six years, despite a brisk expansion in lending.

Banks in China are embarking on a massive fund-raising exercise as their capital bases have been eroded by a government-led credit boom. They also are raising funds in anticipation of rapid expansion and tighter monetary policies in the coming years.

ICBC said it intends to issue as much as CNY25 billion ($3.7 billion) of bonds convertible into its Shanghai-listed shares, and is seeking a mandate from shareholders to sell new shares amounting to up to 20% of its existing Hong Kong- and Shanghai-listed stocks, which could raise around $48 billion based on the bank's Thursday closing prices.

Its action follows smaller peer, Bank of China Ltd. (3988.HK), which is planning to sell up to CNY40 billion worth of convertible bonds in Shanghai and to raise an additional $7.9 billion in a follow-on stock sale in Hong Kong. Similar plans in the pipeline also include Bank of Communications Co.' CNY42 billion rights issue and Shanghai Pudong Development Bank Co.'s CNY40 billion private placement.

In a move to ease public concerns about the supply glut of new shares, ICBC Chairman Jiang Jianqing said: "We are confident that the fund-raising plan won't lead to any dilution in our return on equity, which will be maintained at around 20%.

"We'll keep a close eye on the market before carrying out the plan. ICBC is not in a rush to raise capital as its capital adequacy ratio is one of the highest among all financial institutions in China," he said.

Jiang added that ICBC will have no further funding needs via the secondary market over the next three years, as the latest proposal is sufficient enough to maintain a capital-adequacy ratio of more than 12% in the same period.

The ratio, which governs the amount banks must hold against their risky assets, fell by 0.7 percentage point to 12.36% at the end of 2009, said ICBC, but above the regulatory minimum 11% level for China's big banks. Analysts have said additional increases to banks' capital-adequacy ratios are expected in the near future.

ICBC moves to rein in asset growth

On Thursday, ICBC said its net profit for last year was CNY128.65 billion, up from CNY110.84 billion a year earlier. While the result was strong compared with that of its peers in the U.S. and Europe, it was the bank's slowest profit growth since 2004 because China's easy monetary policy weighed on loan profitability.

Looking ahead, the bank said it will face a series of challenges, including a relatively narrow interest margin and China's economic restructuring. These factors will "exert some pressure on the bank in its push for sound and fast profit growth," it said in a statement.

Also the bank said it aims to increase its total assets by 12%, or CNY1.43 trillion, this year, down from a 21% surge in 2009. Nearly half of the bank's assets are dominated by loans, its statement showed.

ICBC extended CNY1.04 trillion of new local-currency loans last year, increasing its outstanding yuan loans by 24% from the end of 2008. But the credit expansion didn't help lift its net interest income, which fell 6.5% to CNY24.58 billion last year, as Beijing's aggressive interest-rate cuts in the second half of 2008 tightly squeezed its net interest margins.

Instead, the bank attributed its profit growth to a significant writeback of impairment charges on loans and foreign-currency denominated debt. In 2009, it took an impairment charge of CNY23.29 billion for these assets, against a CNY55.46 billion charge a year earlier.

Despite the torrent of lending, ICBC said its assets remained healthy, with its nonperforming loan ratio falling 0.75 percentage point to 1.54% at the end of last year, and the bank said it aims to have the bad-loan ratio of less than 1.40% at the end of 2010.

But the bulk of its loans went to water, environment, transportation, and public utility projects initiated by provincial governments, adding to concerns over the risk from debt incurred by local governments.

ICBC said more than 60% of its new loans last year went to these sectors, and its outstanding loans to local governments' financing platforms now reach CNY720 billion, accounting for 13% of its credit book. President Yang Kaisheng said only 0.03% of the CNY720 billion loans have turned bad.

China's cities, counties and provinces are barred from borrowing directly from banks, but have set up investment vehicles to obtain funds from lenders. Estimates of the total debt incurred by local governments range from the relatively modest CNY6 trillion widely cited in the Chinese media, to the CNY11 trillion calculated by Northwestern University professor Victor Shih.

Memories of a similar government-led construction boom following the Asian Financial Crisis in the late 1990s have drawn mounting concerns that banks in China are risking a return to the crippling bad-loan levels at the beginning of this decade, which resulted in multi-billion yuan bailout from Beijing.

ICBC is 3.9% owned by Goldman Sachs Group Inc. (GS), 1.0%-owned by Allianz SE (ALIZF) and 0.2%-owned by American Express Co. (AXP). The lockup period covering Goldman Sachs' stake will expire April 28.

Jiang said the U.S. bank is "satisfied" with the returns on its investment and has expressed its intention to retain the majority of its existing ownership in the Chinese lender.

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